Wooden Lammas
19th February 2001
Once in a while, a GEM listing catches our eye, and we step back and marvel at the ingenuity behind it. L.P. Lammas International Ltd (Lammas) was listed in Dec-00, issuing 160m shares (20% of the enlarged capital) at HK$0.20 per share. Gross proceeds were $32m but estimated expenses of the small issue amounted to 31% of that, leaving net proceeds of $22m.
The issue, sponsored by Tai Fook Capital Ltd, was done by way of a discretionary placing, and 18.75% of the issue was placed with companies affiliated to Celestial Capital Ltd and Kingsway SW Securities Ltd, two of the four co-managers of the placing. A whopping 88% of the tiny issue was placed with the top 10 placees (including the 2 affiliated placees).
You might think this would lead to somewhat low liquidity, but you'd be wrong - the first day's trading saw 169.32m shares traded, or 106% of the issue, so some shares were traded at least twice in one day. The stock closed day one at $0.305, up 52.5% on the issue price.
After a brief dip, the shares have been what you might call "rampant", closing today at $0.58, making it one of the most successful GEM issues in months, up 190% on the IPO. Daily volume so far this month has averaged 15.4m shares, almost 10% of the float, and the company now has a market cap of HK$464m. We believe this success will prove to be illusory, and when you've read our story, you will understand why.
So what's all the excitement about?
Not much. L.P. Lammas describes itself as a "business brokerage" providing services for "middle market mergers and acquisitions in the Greater China region". It was founded by Louis Pong Wai Yan (Louis Pong) (now 30) back in 1993, when China was all the rage and Barton Biggs was "maximum bullish". The first company was known as "L.P. Lammas China Trade Agencies Limited" incorporated 18-Nov-93 and now dormant. We don't know why L.P. chose Lammas.
The group did not get its first service mandate until Jul-95. The track record in the prospectus covers the 2 years and 3-month period 1-Apr-98 to 30-Jun-00. During that period, it got paid for 19 mandates including 3 which did not successfully close, and total revenue was just $11.15m.
Of that, 2 mandates relate to opposite sides of the same deal, the sale to an unidentified "Hong Kong listed blue chip company" of an interest in a hotel in Hong Kong for $270m, of which Lammas got a total of 1.75% commission, or $4.725m. That one deal makes up 42% of the track record revenue and some 59% of the second year's revenue.
While the hotel was not identified, it may well be the New Astor Hotel, in Tsim Sha Tsui, Kowloon, which was reportedly sold by the private Park Hotel Group in 1999 for between $260 and $280m. We don't know who owns that. The reported buyer was New World Development (NWD) which has the "four streets" urban redevelopment joint venture next door with the Government-owned Land Development Corporation. It would have been a natural fit.
One of the non-executive directors of Lammas is Stewart Leung Chi-kin, an executive director and the General Manager of NWD. The Lammas IPO sponsor, Tai Fook Capital, is controlled by the Cheng family which controls NWD.
An unidentified Nasdaq-listed curtain walling construction company gave Lammas at least 6 of the 19 mandates. The first was for advice on entering the HK and PRC markets, signed on 12-Jan-99. This resulted in the acquisition of a stake in a PRC curtain walling company, for which the PRC company also paid a fee of RMB150,000 ($141,509). The next two were for advice on tenders, one in HK and one in the PRC, both signed on 10-Jun-99, while the final two mandates were signed on 26-Jan-00, both for tenders in HK. The total revenue from this client and the PRC vendor was about $2.96m, or about 27% of the track record revenue.
Our best guess at the identity of the client is Flour City International, Inc, which is a Nasdaq listed curtain walling company based in Nashville, Tennessee, and chaired and controlled by John W Y Tang. In Aug-00 they acquired a 70% stake in a curtain walling company in Shanghai. They also announced in Nov-00 that they were in talks to acquire HK-based privately owned competitor Builders Federal Group.
Another property deal accounted for 2 mandates, when a US client bought an interest in a commercial building in HK from a HK client, and Lammas received a total commission of $0.973m, which was mandated as 0.5% from each side although the final split was slightly different. Lammas stated that it was "not acting as an agent for the sale and purchase of the property" which may have something to do with the fact that it does not profess to be a licensed estate agent. This deal accounted for about 9% of the track record revenue.
I-Wood
Now we take a quick detour into the furniture business. Bear with us, and you'll see why. I-Wood International Holdings Ltd (I-Wood) was floated on the main board in Oct-00. Despite the sexy name, we have not been able to locate a web site for it. The company makes pine and laminated furniture in a factory in Fujian province. 85% of sales are to Japan and 12% in the PRC.
I-Wood's PRC subsidiary was incorporated on 20-Jun-96 and began production in Jan-97. The group floated on the main board as soon as it had the required 3-year track record ending 31-Mar-00. It paid dividends in the last 2-years and up to the IPO totalling $62.1m. In its short pre-IPO history, the Group had made just $66.1m, so nearly all profits had been paid out.
On top of the dividends, the founding shareholder sold 10% of I-Wood in the IPO, giving him HK$20m gross, while the company raised $30m gross. IPO expenses were estimated to be $8.5m to be split in the same 40:60 ratio, but puzzlingly, the prospectus states that the net proceeds to the company were $21.5m, which implies that they paid all the costs. The statements cannot both be correct.
Whenever you see this much cash being taken out of an IPO through dividends, you know that the company isn't going public just to raise money, since its owners could have left the money inside the company.
The founder and Chairman of I-Wood is Mr Yau Kwai Tun (Mr Yau). Not only was a seller in the IPO, but he sold before the IPO too. According to the prospectus, "In January 2000, Mr Yau invited a business partner", a company owned by Mr Wilson Pong Wai San (Wilson Pong), described as "an investor in Hong Kong with investments in a wide range of businesses in Hong Kong and overseas".
Mr Yau sold a 41.2% interest in the Group to Wilson Pong for an unspecified amount. The IPO diluted that stake to 35.02%, leaving Mr Yau with 39.98% and the public with 25%. Despite his large stake, Wilson Pong did not join the board of I-Wood.
Besides Mr Yau, the only other executive director of I-Wood is Mr Wilfred Hung Fan Wai (30), who joined I-Wood 3 months before the IPO. He is a non-executive director of Asia Logistics Technologies Ltd, but was an executive director at the time of their Sep-98 IPO, when they were known as Wah Yik Holdings Co Ltd. Back then, Wah Yik operated bowling allies in Fujian province, before it all went horribly wrong. Mr Hung joined Wah Yik 3 months before its IPO which was sponsored by Tai Fook Capital Ltd, the sponsor of Lammas.
The shares of I-Wood, priced in the IPO at $0.80, closed at $0.40 today. You do the maths.
Back to Lammas
In one of Lammas' other mandates, signed on Valentine's day 2000, it advised a "Hong Kong company specialising in the manufacturing of pine furniture... to search for an investor for the Company". Lammas received a success fee of $1m and out of pocket expenses of $20k. The revenue accounted for about 9% of the track record and about 50% of the revenue for the 3 months ended 30-Jun-00.
Hmmm, pine furniture, Pong, Hong Kong, sale of a stake. Are you thinking what we are thinking? If this company was I-Wood, then the investor whom Louis Pong Wai Yan was searching for, was none other than Wilson Pong Wai San.
It seems odd that the Lammas prospectus did not say whether these gentlemen are related, and whether the transaction should have been treated as a connected transaction even though the fee was paid by the vendor rather than the purchaser.
The Lammas accountants' report provides another link between these gentlemen - Wilson Pong was formerly the owner of 2.5% of L.P. Lammas Asia Ltd (formerly L.P. Lammas China Ltd) and 29.99% of L.P. Lammas Group Ltd (the original L.P. Lammas China Trade Agencies Ltd), which are now wholly owned by Lammas.
Let's go for the hat trick - in a third link, Mr Edwin Lo King Yau (Mr Lo) is listed as an independent non-executive director of both Lammas and I-Wood. Mr Lo is also an executive director of HK-listed Allied Group Ltd and the related Tian An China Investments Co Ltd.
Two other deals in the Lammas track record were "identification and introduction of financier" - basically loan arranging, in the amounts of $15m in Oct-98 and $20m in Apr-99, in each case for a fee of 2%, or $0.7m total. That's another 6% of Lammas' track record revenue. We don't know who the lender was, and no related party was disclosed.
Track record summary
What we appear to have is a company with a market cap of HK$464m but track record revenue of only $11.15m, of which 51% came from two trades of a hotel and commercial property, 27% resulted from a single Nasdaq-listed construction company and 9% came from a deal involving pine furniture company. Those 4 situations cover 87% of the track record revenue.
It doesn't get any better. Results last week show that in the 9 months to 31-Dec-00, revenue was just $3.64m, down 28% on the same period the previous year. In the quarter to 31-Dec-00, revenue was just $0.653m, so we infer that revenue in the quarter to 30-Sep-00 was $0.930m. The directors blamed the slowdown on the "considerable amount of the resources of the Group were devoted to the flotation of the Company". Nice to get your priorities straight. The work that they put in on the float by the time the prospectus went out on 5-Dec-00 did not stop them from saying in the prospectus:
"On the assumption that certain on-going transactions can be completed in fiscal year 2001 [i.e. by 31-Mar-01] the Directors anticipate the Group's turnover to grow significantly"
They'll have some catching up to do in the last quarter!
© Webb-site.com, 2001
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